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The Irregulators vs. FCC: the Trial Begins

Photograph Source: U.S. Government – Public Domain

On January 17, 2020, the Irregulators will appear before the U.S. District Court in Washington, DC, to argue that the Federal Communications Commission (FCC) has facilitated one of the largest accounting scandals in American history.

The Irregulators is an “independent, expert Telecom Team comprised of senior telecom experts, analysts, forensic auditors, and lawyers …,” including former FCC officials.  They will be represented by W. Scott McCollough, Esq., a former Texas Assistant Attorney General.  McCollough acknowledges, “We paid for fiber-to-the-home and we are getting 5G.”

On April 15, 2019, the Irregulators submitted legal briefs to the Washington District Court seeking “standing.”  Standing is a requirement under Article III of the Constitution, the capacity of a party to bring suit in court.  To bring suit signifies the ability of a party to demonstrate that s/he had sufficient connection to — and was harmed by — an action being challenged.  The FCC declined to challenge the Irregulators’ standing claim and, on June 6th, the Court formally ruled that the Irregulators had standing and the case against the FCC could proceed.

The Irregulators argument is simple:

Over the last decade, we uncovered a massive financial cross-subsidy scheme and it is being done by manipulating the FCC’s cost accounting rules that are being applied to the state-wired telecommunications public utilities’ revenues and expenses controlled mostly by AT&T, Verizon and Centurylink.

They are accusing the FCC of “freezing” its cost-accounting rules 19 years ago, thus allowing the nation’s telecommunications companies – the telecom trust – to engage in a bookkeeping slight-of-hand practices that costs telecom users, states and taxpayers across the country an estimated $50-$60 billion a year over the last decade and, over the last decade, totaling an estimated $500 billion and $1 trillion since 2000.

The Irregulators’ challenge to the FCC is based on an acknowledgement that the different lines of business offered by a telecom – e.g., Verizon’s FiOS or wireless — to pay their expenses based on formulas set by FCC accounting rules set in 2000, 20 years ago. The case will show how, for example, Verizon was able to make all of its state utility networks appear unprofitable by using these FCC rules.

The expenses Verizon and other telecoms paid in 2019 are based on the same percentage as 2000.   However, local (or “intrastate”) service – i.e., the basic copper-based phone service – provided was the majority of revenues in 2000 for most telecoms and paid the majority of expenses.  For example, in 2019, Verizon NY Local Service accounted for only 21 percent of its reported revenues but is accounting for 60+ percent of its expenses. The FCC’s policies amount to a cross-subsidy practice in which traditional wireline services help pay for wireless services.

One consequence of this accounting policy is that all of the other lines of business are paying a fraction of the actual expenses that they incur.  Thus, for example, wireless in New York State pays a fraction of the construction expenses while local service paid the majority even though the infrastructure wiring hasn’t been upgraded or maintained.  In addition, the telecoms received tax benefits and users saw their basic phone rates rise.

The case is about more than an accounting shell-game.  It concerns the very future of the country’s telecommunications services, including of 5G — the proposed next generation of telecom service — as well as the Digital Divide, fiber-to-the-home and net neutrality.  Bruce Kushnick, Irreglators team lead, is emphatic: “Irregulators vs. FCC exposes all of the financial hanky-panky that has been going on for over a decade. We took this case to stop these abuses at the federal and state level.”

At the heart of the Irregulators case is a call for federal and state officials – and ordinary telecom users – to remember that phone services are state regulated public telecommunications utilities.  The infrastructure consists of the existing copper wires as well as the fiber optic wires that facilitate wireless and broadband services as well as what is known as “Business Data Services” (i.e., “backhaul” or “special access”).

The case will be adjudicated by the Court over the next few months.  Ever optimistic, the Irregulators anticipate a number of possible outcomes to the case:

+ The Court could require the FCC to fix its rules to stop cross-subsidies.  This will result in returning billions of dollars to states to building-out or upgrade the infrastructure and lowering rates on most services.

+ The Court could decide that the FCC rules are no longer required, thus forcing the FCC to give up control over the infrastructure to the states and get back the billions gained from the cross-subsidies.

+ The Court could leave things as they are, thus enabling the status quo to get worse.  The consequences of this decision could be considerable: the cross-subsidies will continue; the questionable 5G deployments will proceed; telecom competition will further shrink; higher service fees will only increase; and new made-up fees and government subsidies will continue.

The outcome of the case could have significant consequences, especially for the FCC.  The worst-case outcome, the Court’s decision could strengthen the hand the FCC.

Like other federal agencies, the FCC is a corporate-industry captured government agency that has stopped working for the public’s best interests.  The current U.S. Attorney General, William Barr, got his political start serving as General Counsel for GTE Corporation, a telco that merged with Bell Atlantic to form Verizon. He worked closely with former FCC Chairman Michael Powell, a Pres. Clinton appointee, to establish the new accounting procedures. In addition, the current FCC chair, Ajit Pai, who formerly served as Verizon’s Associate General Counsel, pushes ever-greater deregulations — and limited accountability — of the telecoms.

A favorable Court decision could return oversight of the telecom networks to state utilities and likely end cross-subsidies and customer overcharging.  This could force the giant telecoms to deliver on their repeated broadband commitments, including providing fiber-to-the-home instead of the inferior (and some say harmful) 5G telecom service.  This would be an invaluable step in ending the Digital Divide and facilitating net neutrality rather than the further privatization of a public utility.

David Rosen is the author of Sex, Sin & Subversion:  The Transformation of 1950s New York’s Forbidden into America’s New Normal (Skyhorse, 2015).  He can be reached at drosennyc@verizon.net; check out www.DavidRosenWrites.com.

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